Trading high interest for cheap channels won't work for everyone. Precision pricing, and frequent re-pricing, of relationship accounts using the intelligence gained from deposit and customer optimization tools is another strategy that many successful banks are embracing, says Dan Gellar of Market Rate Insight. "More banks are utilizing statistical models and tools to arrive at the optimal price they can offer customers and still maintain cost of funds," he says.
At their most basic, pricing and profitability optimization is understanding at a granular, segmented level, what the price elasticity and demand is for different types of deposit products in different parts of the market, says Frank Rohde, vp of product development and CMO for San Bruno, CA-based vendor Nomis Solutions.
Banks are generally unwilling to talk about results of their price optimization efforts, though Rohde says banks can generate five-to-ten basis points of incremental yield, or 10-to-15 percent increase in balance growth, while paying the same rate as before. Those results may not jump off the page, but that's for a reason, says Brent Lippman, CEO and co-founder of Scottsdale, AZ-based Response Analytics. "This is not radical stuff. If somebody comes in here and says I can make you a 100-point improvement, they're doing something that is too obvious and too dangerous to your image in the marketplace. This is all about subtle changes that go under the radar."
It's not easy, though. The variables are mind-boggling. For example: there are different pricing channels (Internet, branch, call center); different markets (state, region or city); different accounts (standard vs. premium savings account, CDs, money market accounts); different terms (three months, 24 months or five year CDs); and different promotions to go along with those products.
"Very quickly, if you go through the complexity of all those products, you have hundreds, if not thousands, if not hundreds of thousands of pricing cells," Rohde says. "You can't solve for just one of those pricing cells, you have to solve for all of them simultaneously in order to maximize your net-interest margin or maximize the liabilities you're putting on the books."
Due to the increased competitiveness in gathering deposits, most banks are looking for quick fixes, says Terry Moore, who leads global management firm Accenture's banking practice in North America. Though the cost of price optimization services has come down enough in recent years to penetrate the middle market, most institutions don't want to go through the time and expense of price optimization, much less worry about differentiation. It's far easier to price based solely on what an institution's competitors are offering, Moore says. Many banks do this by tracking competitor price changes on Web pricing portals, and adjusting their own rates accordingly. This strategy often results in overpricing, because the Web rates are typically teaser rates, Gellar says.
But banks that don't invest in more sophisticated techniques could be hurting before long. "Right now there's an intense price competition for deposits to fund new lending, and I think that is affecting profitability negatively. It's not a sustainable model," Moore says. "They're raising pricing on CDs and other vehicles and that has a negative impact on profitability. There's only so long that you can utilize that strategy before you have serious viability concerns relative to earnings and profits."